By Robert Younkers, Principal, LB Carlson
In the graphics arts industry, where drop shipping or sending direct mailers across several states can be a regular request, sales and use tax compliance is a complex issue that should be on your radar. If your business is not familiar with the new requirements, keep reading! Rulings in recent years have allowed states to hold businesses liable for reporting taxes even without a physical presence in that state. While this can create a burden on your business, there are options to help simplify the process of sales and use tax compliance.
Overview of Sales and Use Tax
Before the internet and the rise of online shopping, sales and use tax requirements were simple. If a business had a physical presence in a state or local jurisdiction, the business was required to collect and remit payments for sales and use taxes required by that jurisdiction.
The ruling from South Dakota v. Wayfair, Inc. 138 S Ct. 200 (1028) opened the door for states to establish sales and use taxes on businesses without a physical presence in the state.
While sales and use taxes are levied on the purchaser, the burden to calculate, collect, and remit payment falls on the seller. If a seller fails to handle sales and use taxes properly, it becomes liable for unpaid sales and use tax payments and penalties and interest assessed by the state.
Physical versus economic nexus requirements
Sales and use tax filing requirements are triggered by a nexus event – either physical or economic.
- Physical nexus requires a working presence in a state. This can be a warehouse or office location. While an employee living in a state where you don’t have a warehouse or office doesn’t necessarily cause physical nexus, the employee working from home can trigger the need to file sales and use taxes in that state.
- Economic nexus occurs when a business meets the minimum transaction requirements in sales value or quantity set forth by that state or local jurisdiction. Keep in mind:
- minimum thresholds range from $100,000 to $500,000 in sales and/or 200 transactions and,
- a transaction is defined per ”job” noted on the invoice.
It’s important to note a mail delivery of promotional items can count as a transaction. However, if the mailer is listed as one job on the invoice, the delivery, whether it’s to one address or 1,000, counts as one transaction.
Solutions for graphic arts businesses
Determining your business’ sales and use tax requirements can be overwhelming. What should you do if your business cannot dedicate an entire team to managing sales and use tax compliance?
Consider establishing a partnership with a professional who has expertise in sales and use tax, such as your accountant or attorney. Working with an expert can save your business from having to extend internal resources to researching sales and use tax requirements.
Another option is to leverage software solutions that automatically calculate sales and use tax per invoice, per month, and filing period. There is an added cost to subscribing to the software, but the benefit for the business often outweighs the time that would be spent on invoicing and pulling reports. However, the software alone will not be able to determine the jurisdictions where your business has physical or economic nexus.
Special considerations to be aware of
If changes are necessary to the jurisdictions where you collect sales and use tax from your customers, the following can help make the transition smoother for customers:
- Train your sales team so they can help explain the invoice changes to clients and answer questions.
- Remind clients that the sales and use taxes should have been self-reported previously.
- Advise clients on possibilities for sales and use tax exemptions. These vary based on state and local jurisdictions.
Internally you should also consider the following:
- Create an audit process for sales and use tax certificates and exemption forms. Your team show review these every two to three years and collect outdated or missing forms.
- Take ”survey” letters from state and local jurisdictions seriously and have your organization’s team of experts review them. While some may be fishing expeditions, others may be triggered by an audit of a customer in that jurisdiction.
We’re here to help
With more than 10,000 potential jurisdictions for sales and use taxes throughout the nation, businesses must make an informed decision on where to register, collect, and file taxes.
To avoid penalties, take precaution that the information you receive comes from a reputable source. Sales and use tax compliance depend on a variety of factors. LB Carlson has assisted clients in the graphic arts industry navigate sales and use tax compliance issues.